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PROTECT YOUR CHARITY DONATION REBATE


Charities have had to register for charitable status with the Charities Commission since 2007. Registration is voluntary. Unregistered charities can carry out their work and collect public donations; however, charities must be registered with the Charities Commission to be exempt from paying income tax and to entitle people to claim a donation rebate on the donations they make to that charity.

Registered charities have to file annual returns, submit financial statements and certify their officers through the Charities Commission. Officers of a charity can become disqualified from their position if they fall into one of eight categories of officer which deem them unsuitable - for example if they are adjudged bankrupt or convicted of a dishonesty crime.

The Statutes Amendment Bill (No. 2) 2011 is to make three changes to the charities rules that are to take effect as soon as the Bill is passed.

First, registered charities must inform the Charities Commission if a certified officer becomes disqualified, even if the officer is disqualified after they have been certified as an officer of the charity.

Charities with disqualified officers cannot renew their status as a "registered charitable entity" and consequently will not be eligible for tax exemptions. If the disqualified officer
is removed, the charity may still be able to continue as a registered charity.

Secondly, charities must now include as certified officers all those in a position to have significant influence over the management of administration of the charity. Previously charities had to certify the members of their highest governing body, or those with significant influence. Under the new definition of officer, anyone involved in the charity's operation, management or expenditure, including unpaid staff, with significant influence over the use of resources or contracts, will need to be a certified officer. There is no change for charities that are trusts because the trustees are the only officers.

Thirdly, the promotion of amateur sport may be a charitable purpose if the purpose is expressed to be, and is in fact, the means by which a charitable purpose (such as the promotion of health or education) will be achieved. This will widen the scope for registration of amateur sports bodies.

How it affects you

There were 25,785 Charities registered with the Charities Commission on 28th February 2011. If you are making a donation to a charity make sure that it is still registered as a charity, or is a listed donee organisation, if you wish to claim the donation rebate.

MEETING YOUR TAXATION OBLIGATIONS

A recent court case serves as a reminder to us all of the consequences of failing to meet your taxation obligations. The case is an extreme, but the message applies equally to all taxpayers.

A taxi driver, pleaded guilty to charges of providing false or misleading information to the Inland Revenue Department ("IRD"), as well as charges of evading GST.

He had avoided paying almost $607,000 in taxes. The tax evasion and fraud took place consistently between 2000 and 2007.

The taxi driver could not provide the IRD with any documents to support his expense claims, but financial information provided by third party sources revealed the actual levels of income and expenditure was inconsistent with that reported.

In 2007, he started preparing and filing false tax returns for others, charging a 20 per cent fee for his services and warning clients not to co-operate with the IRD if contacted.

Towards the end of 2007, he also started working as a salesperson for a bedding company, where he issued GST invoices despite being unregistered, and claimed an inflated level of expenditure in GST returns.

The taxi driver was sentenced to two years in prison.

Although this is an extreme set of facts there are two lessons to be learned. First, filing incorrect or false returns has consequences. Secondly, the IRD has wide information gathering powers which make detecting false or fraudulent returns reasonably easy.

The IRD Assurance Group Manager, Patrick Goggin, says this case serves as a reminder that the IRD's information gathering and analysis tools are making it "much harder" to get away with evasion and fraud.

How it affects you

If you are consistently claiming higher expenses than your income, and getting income tax and GST refunds, this is likely to trigger a closer enquiry. If you do not have adequate records to support your expense claims, the amounts can be disallowed for both income tax and GST purposes.

Anyone who files a GST or income tax return that contains incorrect information, or for which they do not hold sufficient records to prove the claims could ultimately be looking at possible criminal prosecution. At the very least you could be looking at shortfall penalties and late payment penalties. Take care when filing any returns with the IRD to make sure you can "back up" your returns.

POINTS OF INTEREST…

The IRD has released a draft interpretation statement on protocols for recording interviews between the IRD and a taxpayer.

The end of the first income year for LTCs is approaching, but proposed legislative changes to simplify the taxation treatment of LTCs are unlikely to be passed in time for this year.

Leap year day is recognised to bring the solar year of 365.25 days into line with the calendar year of 365 days.

TO THE POINT…

"If you commit these offences, you will be caught"

IRD Assurance Group Manager Patrick Goggin



ENTERTAINMENT EXPENDITURE AND GIVING GIFTS

We understand an article by the Inland Revenue Department ("IRD") has raised a few queries about the rules regarding entertainment expenditure and giving gifts to clients and employees. Generally speaking, if the expense is not classified as entertainment or a fringe benefit, it will be deductible if it relates to the operation of your business.

If a business provides its employees, clients and suppliers, or prospective clients and suppliers, with any of the following items, only 50% of the cost is deductible because they are classified as entertainment expenditure:

  • corporate boxes, corporate marquees or tents, and similar exclusive areas (whether permanent or temporary) at sporting, cultural or other recreational activities that take place away from your business premises, this includes tickets or other rights of entry;
  • accommodation in a holiday home, time-share apartment or similar, but not accommodation incidental to business activities or employment duties;
  • pleasure-crafts, eg, a corporate yacht;
  • alcohol and food, other than light refreshments, eg, morning tea, that is provided: incidental to the above entertainment; away from your business premises; on your business premises at a party, reception, celebration meal, or other similar social function; at any event or function, on or away from your business premises for the purpose of staff morale or goodwill; or in an area of the business premises reserved for use at the time by senior staff and not open to other staff.

If an employee is given a gift, the full cost of the gift can be claimed as an expense (as long as it doesn't fall within the business entertainment rules), but FBT may be payable unless the gift is less than the general employee exemption and maximum employer exemption. If FBT returns are filed quarterly, there's a $300 exemption per employee per quarter (or $1,200 for the year for annual filers) if a business provides free goods (gifts and prizes), or subsidised or discounted goods and services. However, if the value per employee goes over $300 for a quarter, FBT must be paid on the full value of the benefit. The maximum employer exemption you can claim is $22,500 per annum.

How it affects you

There are a number of functions and events on at the present time, and employers are "shouting" clients, suppliers and staff to these as part of their marketing/morale. Make sure you are treating peoples' attendance at these correctly for taxation purposes.

SHAREHOLDERS CONTINUITY – SALE OF SHARES

The IRD has released a Draft Interpretation Statement regarding when, during a sale of shares, there is a change in who "holds" them.

The person who holds shares issued by a company will have a "voting interest" in the company. The amount of the person's voting interest in the company must be calculated when applying the "continuity provisions" of the Income Tax Act 2007 that govern the ability of companies to carry forward losses; offset losses with other companies; carry forward imputation credits; and carry forward excess tax credits.

The IRD confirms that generally shares are held by the registered holder of those shares, with two exceptions. First, if those shares are held by the registered holder as "nominee" for another person, you look through the nominee. Secondly, if any of the provisions of ss YC 8 to YC 19 or s FB 10 apply (eg, where a person has a voting interest of less than 10% in a company, or they die, or a share option is transferred pursuant to a relationship property agreement). If any of these provisions apply, someone other than the registered holder of the shares may be considered the holder.

Where shares are transferred from one person to another, a change in who holds the shares occurs at the earlier of:

  • when the purchaser becomes the registered holder of the shares; or
  • when the vendor holds the shares as "nominee" for the purchaser

Thus, from a shareholder continuity perspective, shares will transfer on the date that an unconditional agreement to transfer shares settles in full. This may be earlier than the date in which the share transfer is recorded in the company's share register and earlier than the date the records held by the Registrar of Companies are updated. From a tax perspective, the vendor is deemed to hold the shares as nominee or bare trustee for the purchase until the sale transaction is recorded in the company's share register.

If the purchaser is themselves a "nominee" for someone else, the shares will be "held" by that other person. If ss YC 8 to YC 19 or s FB 10 applies so that someone other than the purchaser is the holder of the shares, then those persons will hold the shares.

How it affects you

Shareholder continuity for the purposes of losses and imputation credits is sometimes difficult to manage. This statement provides guidance on the IRD's view of when continuity is to be calculated upon the transfer of shares.

POINTS OF INTEREST…

From 1 April 2012, if you're contributing to a KiwiSaver scheme or a complying fund, all your employer contributions will be liable for ESCT.

The abatement rate for WFFTC increases by 1.25 cents from 1 April 2012.

The WFFTC abatement threshold will be lowered to $36,350 on 1 April 2012.

The IRD has advised that some FBT returns have been filed incorrectly. If an employer wishes to change filing frequency, register for FBT or advise that they are no longer liable for FBT, complete an FBT election form and file it with the IRD.

TO THE POINT…

'When you learn, teach. When you get, give'

Maya Angelou


BREAK FEES PAID BY LANDLORDS

The Inland Revenue Department ("IRD") has issued three draft Public Rulings on the correct taxation treatment of mortgage break fees paid by a landlord.

The first arrangement considered is where a landlord has borrowed money or refinanced under a fixed interest rate loan in order to buy a rental property to derive rental income. The loan is subsequently repaid in full (either in cash or through refinancing) prior to the end of the term and a mortgage break fee is paid.

In that case, the loan is a financial arrangement and so the early repayment requires a base price adjustment to be calculated under the financial arrangement rules. The break fee will form part of the "consideration". The base price adjustment effectively provides a wash up calculation of what would be income and/or expenses under a financial arrangement. This is required because the rules spread income and expenditure over the term of the loan, rather than including only actual income and expenditure. Although on the face of it, a mortgage break fee might be seen to be non-deductible because it relates to a loan for the purchase of a capital asset, the financial arrangement rules recognise the break fee as a cost of borrowing. The expenditure incurred by the landlord on the mortgage break fee will be treated as interest and is tax deductible.

The same taxation treatment will apply in relation to a mortgage break fee if a loan is repaid "early" as a result of the sale of the rental property.

When a fixed interest rate loan is varied by a landlord to alter the interest rate no base price adjustment will be required by the landlord.

If the landlord is not a cash basis person [someone who does not have to return income and expenses under the financial arrangement rules] or, has chosen not to be treated as one, the amount of the mortgage break fee will be deductible only to the extent provided under Determination G25. This means it will effectively be spread over the term of the loan.

A landlord who is a cash basis person will be entitled to a deduction when the mortgage break fee is incurred.

How it affects you

If you are a landlord and you look to make any changes to your fixed interest rate loan facilities, or you sell a rental property and use the proceeds to repay a fixed interest rate loan, you will need to confirm with your advisor what deduction you may be allowed to claim, if a mortgage break fee is paid.


CURRENT TAX TAKE FOR NEW ZEALAND

Figures released recently by the Crown accountants have disclosed that the Government's tax revenue is significantly lower in the first seven months to January 2012 than projected in the Budget 2011. The three largest areas of revenue that are below projection are:

  • PAYE down 3% or $400m
  • GST down 4% or $350m
  • Corporate tax down 5% or $250m

The report suggests that not only is growth in employment lower than expected, but growth in wages has also fallen behind forecasts. GST is around 27% of the total tax revenue, but in this past year a large number of refunds have been issued to insurance companies as a consequence of the Canterbury earthquake claims.

Finally, the corporate tax take makes up approximately 15% of the total tax revenue. It is expected that corporate tax will continue to be below forecasted levels due to the general trading economy.

Overall, the Government has suggested there are two main hindrances to the collection of revenue, namely the slower rebuild of Christchurch following the aftershocks before Christmas, and the ongoing effect of low confidence in the European situation.

In a speech to the Tax Agents Institute of New Zealand on 9 March 2012, the Hon Peter Dunne noted that the Government expects to be able to re-dress the revenue collection through its tax policy work programme. Increasing efficiencies through inter-agency information sharing, increased use of technology for taxpayers to interact with the IRD, and a focus on preventing debt, are key areas designed to improve revenue collection. Further, there is a continued focus on fairness. The use of companies and trusts for business vehicles must be limited to situations where there is no artificiality or contrivance to defeat tax, and there is a continued focus on recovering tax from those in the cash.

How it affects you

Projections have been re-forecast having regard to the year to date information. The lowering of tax rates for individuals and companies is not due to be reviewed as yet, although the path to a Government surplus is likely to be a harder road then projected. These are still tough financial times and we simply need to keep our businesses going as best we can. If you are in a cash industry, expect to be under the spotlight and, if you have an IRD debt, you are likely to receive phone calls, texts, and letters from the IRD for a payment plan.

POINTS OF INTEREST…

Student loans are to remain interest free, at least in the meantime.

KiwiSaver Amendment Regulations 2012 will make changes to the reporting requirements of KiwiSaver schemes.

The IRD has issued two Special Determinations in relation to the tax treatment of certain convertible notes.

The 2012 Budget is to be delivered on 24 May 2012.

The IRD has issued a document discussing various taxation issues affecting kiwifruit PSA v orchards.

TO THE POINT…

'Now there are all manner of strange and wonderful new taxes that could be introduced to raise revenue if that was our only objective'


Hon Peter Dunne



ACCESSING CASH TAX EFFECTIVELY ON LIQUIDATION

It is generally possible for a company to distribute capital gains (subject to any tainted gains that arise on the sale of an asset to an associated person) tax effectively to its shareholders upon liquidation.

From a taxation perspective, liquidation is defined as being the removal of the company from the Companies Office Register, and includes anything occurring on liquidation during the period that starts with the first step that is legally necessary to achieve liquidation. This includes the appointment of a liquidator or a request for the company to be removed from the register under s 318(1)(d) of the Companies Act 1993.

The Inland Revenue Department ("IRD") has issued a ruling on the commencement of liquidation that confirms this could be a resolution of shareholders or the board, or any other overt decision-making act provided for in a company's constitution, to adopt a course of action that will end in the removal of the company from the register. This could be something as simple as; "the board resolves to sell all assets and repay all liabilities with a view to winding up the company".

In some cases, the first action taken or document completed is a resolution to appoint a liquidator.

Where the appointment of a liquidator is the first step, the written consent of the liquidator is required before a resolution can be made to appoint a liquidator (refer C of IR v Edmonton Group Limited & Ors, HC Auckland CIV 2004- 404-1567). If the resolution is passed before the liquidator's consent is obtained, the resolution is invalid and this is not then the step that triggers the liquidation for taxation purposes.

How it affects you

If a company is facing liquidation, or there are capital gains that a board wishes to make available to shareholders tax effectively, it is important to work with your tax advisor to ensure the correct process is adopted to ensure no unforeseen taxation consequence arises on distribution of that capital reserve.


PAYROLL GIVING UPDATE

The Payroll Giving Early Adopters' Group, that comprises a mix of small and large employers, has developed a new website which aims to answer questions and provide information for employers considering offering the scheme in their workplaces.

Payroll giving is the scheme that came into effect in January 2010 that allows an employee to donate to their nominated charity through their employer's payroll. It enables employees to receive the tax benefit of their payroll donations each payday in real time. No receipts are required as the tax credits for donations made as part of payroll giving will be immediate in the form of reduced PAYE. Donations that are not made through payroll giving can continue to receive tax relief through the ordinary rebate process at the end of the year.

Payroll giving is currently offered by 1,300 employers and over 100,000 employees have access to a scheme. The statistics on the IRD's website indicate that "since payroll giving was introduced, nearly $4.8 million has been donated directly from a growing number of peoples' pay to their favourite charity or donee organisation. In December 2011 alone nearly 2,200 employees donated just over $275,000. Because the donations were made through payroll giving, these employees received immediate tax credits totalling just over $91,000.

The new website launched by the Payroll Giving Early Adopters Group is designed to provide helpful information for large and small-medium sized employers.

In a media statement regarding the launch of the website, the Hon Peter Dunne stated "One of the most useful things for employers contemplating offering the scheme is to be able to learn from the experiences of other employers just like themselves. The site will provide useful insights and learnings from employers who have successfully established payroll giving schemes".

How it affects you

If you are an employer and are thinking about whether or not to offer payroll giving to your staff, the website may provide you with information and details of experiences that you cannot find anywhere else. There is an administration cost in offering payroll giving, but the benefits to your staff are clear, and these may outweigh any administrative burden to you as an employer. Further, in an economic environment such as this, it may be one way of providing your staff with a "benefit" without paying additional wages or providing fringe benefits that are subject to tax.

POINTS OF INTEREST…

The National Student Loan bill is projected to increase to more than $14 billion in the next three years.

The IRD collected an extra $115.3 million of tax debt as of 30 June 2011 than in previous years.

A campaign by the IRD involving letters, text messages, and phone calls, prompting the payment deadline on 7 February 2011 saw 11% more customers paying tax on time than the year before.

The Law Commission has released a fifth Issues Paper in the Review of the Law of Trusts: "Court Jurisdiction, Trading Trusts, and Other Issues".

TO THE POINT…

"New Zealand is a big hearted country. New Zealand is in second place behind the US for charitable donations"

Hon Peter Dunne

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